Paying the Price

Major oil companies are gobbling up independent gas station operators, all in the name of greed

Similarly, Exxon documents show intent to halve its number of lessee dealers in the Houston area while doubling the number of company stores between 1997 and 2003. And according to news accounts, Shell planning documents unearthed in an Indianapolis lawsuit detail the company's plan to shift the balance in that city's retail market away from the dealers. "They wanted to make this a company-op town and drive the dealers out of business," says plaintiffs' attorney Linda Pence.

The dealer attrition rate has varied over time by company and region, though the direction hasn't wavered. Exact numbers are hard to obtain because oil companies consider the information proprietary, and stations can be lumped in broad categories that hinder comparisons. But the available data provides a vivid picture of a dying institution: Between 1988 and 1998, Chevron cut its lessee-dealer network from 9,317 to 939. During the same period, BP's numbers plummeted from 1,025 to 475; Exxon chopped its tally from 2,909 to 1,600.

In comparison, Shell's collection of dealers dipped less dramatically during that span. But beginning in 1998, when it merged its marketing operations with Texaco, Shell decided to play catch-up. Within months, hundreds of dealers had shut their doors, and others have followed suit in droves. Including Warren Schuermann, who was informed in the spring of 1999 that his lease would not be renewed.

Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.
Wild Don Lewis
Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.
Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.
Wild Don Lewis
Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.

Two years earlier Schuermann had received an offer to buy his station for $200,000, but he'd opted not to sell. "I wanted to save the business for my employees, which was very stupid," he says. After 48 years, he walked away with nothing.


After more than 21 years as a Shell employee, Bill Reed had planned the perfect retirement. He had been a marketing rep in Los Angeles and knew everything there was to know about the gas station business. So in 1993 he took out a Small Business Administration loan and plunked down $378,000 for a station in Victorville, northeast of the city. Though the traffic was seasonal, he more than doubled the gas sales to an average of 170,000 gallons a month. Two years later he invested another $150,000 for a station three miles away in Hesperia.

Under Shell's Variable Rent Program, Reed's rent went down the more gallons he pumped, so he was able to offset the leaner months with healthy profits when business was brisk. "For 20-something years, I bled yellow," Reed says. "Shell Oil Company could not do any wrong."

In August 1998, the letter came: Shell was phasing out the VRP, even though Reed -- as well as almost every dealer in the country -- had been told not to worry, that the inflated rent figures in their contracts were there only as a hedge against another oil crisis. But those guarantees had all been oral, and Shell's leases allowed the company to terminate the program at will. Reed was stuck with payments for his two stations that averaged $15,000 a month more than before.

Moreover, Reed's wholesale cost was consistently higher than that of his competition, which left him the choice of keeping his price low and losing his profit margin or keeping it high enough to pay the rent and losing sales. Either way, he lost. "I was taking money out of my savings account," Reed says. "It got to the point where I just couldn't do it anymore."

Eventually his Hesperia account ran short and Shell put him on COD, which constricted his cash flow. Reed gave up the keys in August of last year, hoping to salvage his Victorville station. But Shell began withholding his credit card reimbursements, claiming he still owed the company money from the Hesperia location. The amount swelled to $50,000 before he threw in the towel. He still owes $100,000 on his SBA loan. "Right now, I'm very bitter," Reed says.

In court filings, Shell has denied that anyone ever told dealers that the Variable Rent Program would remain in place indefinitely. But financial statements prepared by prospective dealers with the company based estimated profits on a variable rent; in five cases reviewed for this article, the statements each would have shown a net loss had the higher, contract rent figure been applied. One of those, submitted by dealer Martin Swofford for a station in San Ramon, Calif., and approved by the company, induced Swofford to buy the station. One month later the VRP was canceled. Dealer rep Ken Giffin stated in a related court filing that he and other employees were instructed to tell dealers the VRP was to continue indefinitely. "As a practical matter, dealers were dependent upon the VRP program economically, and the company knew that."

Though Shell is the most recent oil company to spike rents, it didn't invent the concept. In the 1980s Texaco figured out that raising rents to the breaking point was a good way to obtain locations the company wanted for itself. "The basic philosophy was, they just kept raising the rents till [the stations] wouldn't be profitable," says former Texaco employee John Gryder. A dealer rep until he retired in 1988, Gryder would make rent recommendations in pencil and forward them to his boss. When they came back, the figures had been inked -- at 20 percent higher than what Gryder thought fair. "They discriminated as a policy," he says.

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